Dollar rises as IMF sounds warning

Euro slide aggravated by data error on Spanish 10-year benchmark

WilliamL. Watts

LOS ANGELES (MarketWatch) — The U.S. dollar rose Tuesday, finding safe-haven-related support after the International Monetary Fund cut its forecasts for global growth and sounded the alarm over a worldwide slowdown.

The ICE dollar index
DXY, -0.30%
which measures the dollar against a basket of six currencies, traded at 79.973, up from 79.595 in late trading during the previous session.

“It seems clear that from a growth perspective the dollar looks better supported than European currencies, and with positioning now close to square in the euro, new impetus is required to extend the dollar decline of the last few months,” wrote strategists at Lloyds Bank in London.

The IMF on Tuesday cut its 2012 forecast for global growth to 3.3% from a 3.5% forecast made in July, while the 2013 forecast was cut to 3.6% from 3.9%. The IMF said France, Spain and several other euro-zone governments won’t hit budget-deficit targets agreed with European authorities. See: IMF: Key euro-zone nations to miss deficit targets.

With the IMF’s downgraded growth expectations, “now we have central banks, major corporations [...] and global investors worried about economic activity in the months ahead,” Kathy Lien, managing director at BK Asset Management, told clients. “This means monetary policy needs to remain easy and perhaps become even more accommodative in certain parts of the world.”

The report came IMF and World Bank officials met in Tokyo. The gathering will run through Oct. 14.

The IMF also warned that U.S. growth could stall in 2013 if politicians fail to avoid the so-called fiscal cliff, which could “inflict large spillovers on major U.S. trading partners and also on commodity exporters.”

The euro earlier Tuesday dropped from around $1.2985 in less than a half hour. Strategists struggled to come up with an ironclad explanation for the fall, but said it may have been spurred by a data error after Bloomberg mistakenly listed Spain’s January 2024 bond as the 10-year benchmark rather than the January 2022 issue.

As a result, some data displays temporarily showed Spain’s 10-year bond yield moving back above 6% and a massive widening in Spain’s yield spreads versus other benchmarks. That may have sparked some automatic, program-driven euro selling, said Adam Cole, currency strategist at RBC Capital Markets in London. See The Tell: Why the euro experienced sudden downdraft.

In a statement, Bloomberg said the data had been corrected to show the 2022 bond as the benchmark and that it is investigating the “root cause” of the issue.

A meeting of euro-zone finance ministers late Monday produced a widely-expected agreement to release the latest disbursement of aid for Portugal. But the meeting provided no evidence Spain is moving closer to requesting a full bailout or that officials were set to resolve questions over the release of the next round of aid for Greece. European Union finance ministers met Tuesday.

The European Stability Mechanism, the euro zone’s permanent rescue fund, was officially established on Monday, “so all the mechanisms are now in place for the [European Union] to provide emergency support to countries that are experiencing excessively high yields,” the Lloyds strategists said.

“But at the moment, Spain and Italy remain disinclined to ask for help, leaving the markets in limbo,” they said, with the euro likely to remain confined to a range of $1.2870 to $1.3070.

The British pound
GBPUSD, +0.1346%
traded at $1.6001, slipping from $1.6031. The Australian dollar
AUDUSD, +0.1508%
advanced to $1.0207 from $1.0177 late the previous session, as the Aussie dollar “benefitted from a slight improvement in business confidence,” said Lien.

What Merkel's Athens visit means

(18:37)

German Chancellor Angela Merkel will visit Athens Tuesday, but will likely be met with mixed reaction.

Earlier, risk-oriented currencies rose, and the dollar weakened, after the People’s Bank of China injected a large dose of liquidity into the Chinese banking system, raising optimism for further policy moves. See: Shanghai, Hong Kong stocks jump to lead Asia.

China’s central banking chief highlighted worries that the mainland economy is facing big downward pressure and said monetary policy must remain flexible and set with a pre-emptive bias to help counter the weak external environment. See: PBOC's Zhou pledges flexible policy.

Against the Japanese currency
USDJPY, -0.20%
the dollar traded at ¥78.29 yen, down from ¥78.32 in late North American trade Monday.

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